Marcos Toledo, partner at Canary VC firm
Marcos Toledo, managing partner at Canary, a Brazilian VC firm. Photo: Courtesy/Tiago Queiroz

Marcos Toledo, from Brazilian Canary, the 'cool hunter' among VC firms: "When there is no business yet, you invest in people"

Known for its keen eye for identifying good businesses when they are not yet good – and sometimes not even business – the Brazilian venture capital firm Canary wants to be a reference in early stage in Latin America. In an interview with LABS, Marcos Toledo, co-founder and managing partner of the company, explained how

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Known for its keen eye for identifying good businesses in their very early stage – like a kind of ‘cool hunter’, but of startups – the Brazilian venture capital firm Canary ended 2021 by announcing an investment fund, the company’s third, of $100 million focused on the “first check” for Latin American companies.

Canary’s fund three is expected to invest between 40 and 60 early-stage startups, keeping pace with funds one and two, which have raised $45 million and $75 million, respectively, in 2017 and 2019, and secured checks for 51 companies each. With the new fund, Canary aims to consolidate its position as a reference in early-stage investments in Latin America and as a local partner of major global VC firms such as SoftBank, Ribbit, and QED.

With only five years, the figures confirm the VC firm’s reputation: Canary’s investee companies have made 69 follow-on rounds, securing $2.3 billion in new investments and providing more than 5,400 direct jobs across the region. In its portfolio are companies such as Buser (mobility), Sallve (beauty), and Hashdex (digital assets), considered innovation references in their fields.

Canary’s co-founders: Mate Pencz, Patrick de Picciotto, Florian Hagenbuch, Julio Vasconcellos, and Marcos Toled. Photo: Canary/Gustavo Scatena/Courtesy

In an interview with LABS, Marcos Toledo, co-founder and managing partner of Canary, spoke about the company’s investment thesis, about the subjectivity needed to identify good ideas and good entrepreneurs – “We end up becoming a hub for people,” said Toledo – and about the region’s innovation ecosystem, which, the more infusions of venture capital it receives, the more fertile it becomes for new ventures.

Here are the main excerpts from our recent conversation with Marcos Toledo:

LABS – Can you tell us a little bit about Canary’s history and why you decided to pursue this line of investment? 

MT – The idea was to create a venture capital company in Latin America. The design of this idea started in 2015 or so. At that time, we saw high-quality entrepreneurs – and they were getting better and better, very quickly. These were people building businesses in Brazil and Latin America. And the venture capital industry in the region was still developing. You had a few funds and there was a lot of room. On one side you had very good people, who were doing more and more business, and on the other side, there was a lack of money. And not just money, but a whole ecosystem. A lot of things had to be developed. There were few funds, and most of them were focused on investing in companies that were already running in some way, that already had some tradition, customers, team, etc. And there was no one doing the initial check required to make a business viable. 

Another reason is that we thought we were well-positioned to do this, we thought we had the experience to do this kind of thing – to take risks. When there is no business yet, you invest in people. Many times we invested and we didn’t even have the idea or a name. There were just people. 

LABS – And how does Canary work?

MT – Today, we focus a lot on bringing people together, on helping to build the initial team. When you put the initial team together, you start testing your hypothesis. For example, the hypothesis that people want to buy cheaper car insurance, without a broker. It is a hypothesis. You need clients to test this hypothesis. We also have to help a lot with this part of connecting with customers. Then, if you can confirm this hypothesis with the clients, you need to accelerate [the company]. You need to do a little branding, a little PR, etc. We help you do those things and also bring in capital. We specialize in connecting the companies we invest in with other global investors. We are trying to position ourselves as the first investor for the companies, for the founders. But also as the first investor for the global funds. Nowadays, global funds look at us a lot, they want to see what we are doing and they use our work as a kind of filter. We end up becoming a hub for people. 

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LABS – Are you considering making larger rounds?

MTL – Yes, Canary really wants to be this specialist in the first check. That is our focus. But, as an investment firm, we have already been doing other things. Under the same firm, I have another partner, which is Julio Vasconcellos, managing Atlantico, a fund that invests in rounds further ahead. To answer your question: yes. We want to do more things, we have been doing more things within our ecosystem, but each partner is focused on a strategy. 

LABS – Which sectors are you looking at? What are you betting on? 

MT – The focus on investing in people is curious because, in fact, the sectors and the businesses are a result of the people we chose. If you ask me whether I will invest more in health or in fintech next year, I have no idea. I will invest in very good people and these people are choosing as a life project something interesting that can be something very, very big. We have already looked at companies in the carbon credit market, we have invested in companies that make infrastructure for credit, in e-commerce companies, in internet infrastructure companies… We have, in fact, several types of investments in different sectors. 

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LABS – You are looking less at the industry and more at people. But what exactly are you looking at? What do you look for in a founder when you decide to invest in him or her? 

MT – It is a qualitative analysis. We have been trying more and more to use data to quantify this. Because it is very difficult, isn’t it? Today we use more than forty variables and they generate a score. We are not judging people. We are trying to judge our analyses. What is this person’s professional history? How long have these founders known each other? Do they know the industry they are working in now? Do they know the consumer they are working with? Do they know the business model they are working with? 

In the end, to answer more concisely: we have to try to understand if the skill set, if the skills of that group of people make sense for the business they are going to build. This is what we call founder-market fit.

We look a lot – and it is super-difficult to measure – at ambition. And this goes together with another thing we look at a lot, which is obsession. Are these founders obsessed or are they kind of opportunistic? Do they want to make a life project or are they following a fashion? Obsession is also something difficult to measure, but we try to use many references – talking to former partners, former bosses… – to try to make an evaluation.

LABS – What is your opinion about investing in early-stage startups focused on ESG (Environmental, Social and Corporate Governance)? 

MT – We spent a week doing strategy meetings for next year and talked a lot about this, actually. What we have seen is that today entrepreneurs are already much more aware of this. Even before we talk about ESG, this new generation of Latin American companies is thinking a lot about governance, about sustainability. I think this is a super cool thing. In the past, there used to be this view that, in the large fortunes linked to Latin American companies, there was always something wrong, you know? The guy evaded taxes, did not treat his employees right… There was always a story. 

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What cheers me up a lot today is to see that a good part of the companies in which we invest respect the employees, think about diversity, think about the environmental impact… it is a business that is changing a lot. On our side, we have a bias of always looking for people who have this mindset – who are conscious about this kind of thing. That said, the fund does not have an ESG portfolio. As we invest a lot in the beginning, sometimes people don’t even have a business set up. So we don’t filter by business, we filter by people. But we choose people we believe in and who are willing to do things right. I think that is the point. 

LABS – The process of choosing an investment seems to have many subjective variables. How much time do you dedicate to this process until you make a decision and sign the check? 

MT – It is subjective, you are right. But on the other hand, being subjective is no reason to be time-consuming. There is not much to look at. Are you going to evaluate the company’s accounting? No. Because the company doesn’t exist yet. So what do we have to do? Spend some time to analyze people, look for references, talk to people who already know these people… And you have to feel comfortable with these variables. But it is not a time-consuming process. And this is one of the reasons why we created the fund. 

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When we thought about creating it, we lacked an investor in Brazil – and in Latin America – who could do it faster. Because founders don’t have time. Time is very scarce. When you are setting up a company, each day that passes counts a lot in the vision of your capital. One of the reasons we did the fund was to create the possibility to close things fast. 

We have in our DNA great respect for the good of the entrepreneur, who in the end is the one who matters. Our goal is to give an answer within a week – if the answer is no. And if we think [the hypothesis] makes sense, sometimes we end up spending another week, at most, to make calls. It is something to be closed in two, three weeks at the most. It is supposed to be fast. But it is a deadline that we measure in days, not weeks. 

LABS – Does Canary offer what some firms call founding services?

MT – We want to be a platform to help companies, but very specialized in the stage in which we operate. Our main pillars are people and capital. And then, eventually, clients, etc. We are not that traditional fund that acts as a consultant.

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LABS – Do you have stories of failure in your portfolio? 

MT – It is part of our work. We imagine that a good number of companies will not get there, unfortunately. But that’s how it works in innovation. We always try to understand what happened, and in most cases [what goes wrong] is the hypothesis. 

LABS – And how do you evaluate the time to exit an investment? 

MT – We make the first checks in the first two, three years (in a ten-year fund). All the other years we keep investing, helping the companies, but we work on a long-term basis. So our idea, really, is to only exit when we need to, near the end of the fund. We have already had some exits that occurred earlier, but it was because the founders themselves wanted to sell the companies.

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LABS – There has been a jump in venture capital infusions in Brazil and Latin America in the last five years. In your opinion, what explains the investment funds’ enthusiasm? 

MT – The venture capital world is a little detached from the rest of the economy. While we see interest rates rising, the stock market falling… in the venture world it is the opposite, the economy is accelerating. I think that one of the reasons for this is the maturation of the ecosystem, of the market. 

Our vision is that we are just at the beginning. There are news reports about records [of investments], but we come from such a small base… and the foundations are being built. There is not just one variable. The first unicorn in Brazil came up in 2018. There was none. Now, in Latin America, by my count, there are almost 30. in four years! It was very fast. Before there was nothing. Today there is something. And this something is starting to attract a lot of attention from talents and, again, we go back to the story that you only build companies with people. And you start to have a huge flow of people migrating to these companies. With that, the funding, the money, starts to follow these people. That is one reason. 

The other is that you had little activity from non-local funds. So most of the activity was from local funds. Brazilian or Latin American. What is happening now is that we are seeing a lot of global funds turning their radar over here because of the maturation of the ecosystem, coupled with the fact that there is still a lot to be created here. Another part of the maturation of the ecosystem that I think is nice to highlight is that now we are seeing more and more second-time entrepreneurs. That is a business that didn’t exist so much. Now, there are people who have started their own business and, regardless of whether the work went right or wrong, are starting it again. 

In our fund three, we have many more second-time entrepreneurs than in funds one and two. They are more experienced people. I think the global funds see that this is a region with a lot of opportunities. They see that now is the time to look at Latin America